Are you an investor who has lost money because you believe your broker made investment recommendations that were inconsistent for your age, income, investment objectives and/or investment risk tolerance? If so, you may be the victim of something called “unsuitability.”
In making an investment recommendation to a client, a broker must make recommendations that are consistent with the customer’s risk tolerance, needs and investment objectives. A broker has a duty to know his client and only recommend investments and trading strategies that are suitable for that client. An investment may be unsuitable if a customer does not have the financial ability to incur the risk associated with a particular investment, if the investment was not in line with the investor’s financial needs or if the customer did not know or understand risks associated with certain investments.
A broker has a duty to gather essential information in order to understand the risk tolerance of an investor, the tax considerations for the client, the client’s prior experiences and appetite for risk, and the level of return desired. It is the duty of a broker to make recommendations that are appropriate and suitable given his client’s circumstances. If a broker breaches those duties and makes unsuitable recommendations for a client, the broker may be liable to that client.
A broker must also have a “reasonable basis for the recommendation.” The broker’s basis for the recommendation can be the firm’s research, in which case the firm must have a reasonable basis for its own recommendation.
All brokers and broker-dealers must have a reasonable basis for recommending a series of transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s objectives. Thus, while a small investment in a particular product may be suitable for the investor, a large portfolio concentration in the same or similar products may be unsuitable for the same investor. In addition, the pattern and type of securities activity in the account can also be unsuitable for the investor. Factors such as turnover rate, cost-equity ratio, and use of in-and-out trading tactics indicate excessive activity that violates quantitative suitability standards